When young adults set out to buy a car, get a job or rent an apartment, it is increasingly likely that the seller, employer or landlord will examine their credit history along with their application. Good credit, the thinking goes, indicates good character. So how does a person without a car, a job or an apartment get credit?
Is there such a thing as too early? Maybe. But these days, even toddlers are eager to “help” with ATM transactions and QR-code swipes for purchases. While they don’t need to understand advanced economic theory, their financial education begins with what they see day in and day out. The behavior – good or bad – modeled by family members will serve as a guide for their own attitudes toward money.
Here are some suggestions for helping kids become credit-worthy and credit-savvy:
- Make money a conversation. Talk openly about how much things cost, how bills get paid (and why it’s so important to pay them on time!), and how unexpected expenses arise. Explain why you might decide to buy something – or not.
- Goals are worthwhile. Even a young child can learn how to save a small portion of their allowance each week for something they want. A hand-drawn chart can help illustrate the process.
- So how much do things really cost? The cost of a purchase is more than the retail price. It includes tax and, often, shipping/handling charges. Help your child see and compare the full cost of the things they want and understand how that amount compares to what they’ve saved.
- Where does money come from? Money = Mom is not a practical formula for financial independence. As kids get a little older, they can increase their buying power by earning additional money.
- Debt may be a four-letter word, but it doesn’t have to be toxic. Most of us go into debt to buy cars and houses. We budget to cover our debt and earn credit as we pay it off.
- Create a budget. You can find loads of helpful suggestions online, including budget worksheets for kids.
- If financial education classes are available in your child’s school, take advantage of them.
When your child has demonstrated their understanding and seems responsible, there are a few things you can do to help them get good credit:
- Make your child an authorized user on your credit card. Your child will have a credit card with their own name on it. You will still have to pay the bills, and if you fail to pay on time, it will affect your credit and your child’s. But you will be able to see where your child is spending money and, if their spending gets out of hand, you can withdraw your authorization.
- Co-sign on your child’s credit card, student loan, or car loan. In this case, you have no control over what your child buys, and your child must make regular payments, and you are ultimately responsible if they fail to pay.
- Help your child apply for a secured credit card. A secured credit card is used like any credit card, with charges accumulating and bills issued and paid (on time!) each month. The difference is that a deposit is prepaid into the credit card account, and that becomes the credit limit. Unlike a debit card, secured credit card activity becomes part of the user’s credit history.
- Help your child apply for a store credit card. It may be easier to get a store credit card, but regular purchases and on-time payments are very effective in establishing credit.
- Request that rent payments are reported to the credit bureaus. Your child can use on-time rent payments to build credit if their payments are reported. Some large property management companies do this routinely, but there are also a number of rent-reporting services that will handle this for a fee. See an explanation by the credit-reporting company Experian.
Educating your children about finances is something we strongly encourage here at Sente. Click here to check out some of our other blogs on this same topic.
Good credit doesn’t happen overnight, but good financial management skills can last a lifetime. Talk with your child about responsibilities and expectations for each of these steps. And, of course, you can always visit your local Sente Mortgage office and talk with a loan officer about other creative ways to build your child’s credit.